Whether you’re trying to figure out a way to achieve a credit card debt payoff or learning about how credit works, it can help to understand the following regarding credit card balance:
- How it is calculated
- How interest affects your balance
- How to stop paying so much interest
These are all essential when trying to get out of credit card debt.
Read more: How to Check Credit Card Balance
1. Balance and Interest
Your credit card balance represents the money you owe the credit card issuer. Every time you use your credit card, it adds to the balance. But there’s more to it than just the actual purchase price. You have to account for accrued interest if you don’t pay the full statement balance every month.
A credit card debt calculator will add in your interest, so you know the full cost of your credit card balance in the long run. If you are using the calculator to see how long it will take to pay off your credit card balance, it will calculate how much interest you might accrue in the time it takes you to pay it off.
2. Credit Card Utilization
Your credit card utilization accounts for the amount of your credit line you’ve used. For example, if you have a credit card balance of $3,000 and your total line of credit is $10,000, you have a utilization rate of 30%.
The more you use your line of credit, the more it can impact your credit score. As with many things in life, it’s all about maintaining balance. While you don’t want to go over the 30%, regularly using your credit card may help your overall credit score. But how do you keep a good utilization ratio?
3. Keeping a Good Utilization Ratio
Maintaining a good credit card utilization ratio may seem like it’s easier said than done. You need to consistently pay your balance down to keep it from going too high. You can have a higher utilization ratio on one credit card and a lower one on another so long as you keep your overall utilization score low.
Another way you can help your utilization score is by applying for a credit line increase. This gives you a higher line of credit, which raises your amount of “unused” credit. For example, if you increase your line of credit from $10,000 to $13,000, your utilization rate would drop from 30% to 23%, even though your balance has remained the same.
4. How to Avoid Paying Interest
How much interest you are paying is dictated by your APR. What is a good APR for a credit card? Generally, the lower the better. The higher the APR, the more interest you might pay on any remaining balance.
If you want to stop paying interest, you might want to pay off your balance in full at the end of each billing cycle. You don’t have to pay off your card as soon as you charge it, but it’s a good idea to pay it before the end of the billing cycle. Paying the minimum amount might not cover everything, which will add interest to your balance.
Hopefully, this information has helped you better understand what a balance is and how you can avoid paying interest on your credit card. If you need a different solution to help you pay off credit card debt, consider a credit card balance consolidation service such as Tally, for example.
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Disclosures: Lines of credit issued by Cross River Bank, Member FDIC, or by Tally Technologies, Inc. (“Tally”), NMLS #1492782; see your line of a credit agreement. Lines of credit are not available in all states.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% – 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 – $300.